The faces behind the Pie Face float

Pie Face is aiming to give Australians the chance to put their money where their mouth is: into pies.

Pie Face’s best-selling pie is the chunky steak, which sells for about $5, and customers have also shown a fancy for “the stack" (a pie, mashed potato and gravy in a box).

After rolling out almost 50 pie shops, Pie Face Holdings has appointed Macquarie Capital Advisers and CBA Equities to prepare an initial public offering.

The company hopes to float in 2012, but first needs $10 million capital to ramp up the next phase of growth and re-finance its senior debt.

Pie Face chief executive Wayne Homschek told Financial Review DealBook that the Pie Face concept had proven successful; the business was set for serious expansion over the next 12-months; and 2012 would be the right time to hit the ASX.

“We will go [to IPO] in 2012 if Macquarie and CBA think we are ready and if we’re feeling like we are achieving what we hope to achieve between now and then," said Mr Homschek, an investment banker who immigrated from the US 22 years ago.

Those goals including developing a second production line at its production facility in Marrickville, in Sydney’s inner west, continuing its store roll-out program and improving margins.

Pie Face has 49 stores open across Sydney, Melbourne, Brisbane, Canberra and the Gold Coast and is planning a national rollout.

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Ties to small cap retailers and retail investors win Macquarie and CBA the gig

Macquarie Capital’s global head of equity capital markets, Wayne Kent, won Macquarie the role of financial adviser for the planned initial public offering and joint lead manager. Associate director Sam Bowen is expected to do most of the day-to-day work.

CBA’s head of equity capital markets, Jay MacGregor, ensured CBA won the other joint lead manager role.

Macquarie was chosen for its success in floating small cap retailers with a promising growth story, such as
Carsales.com
,
JB Hi-Fi
and
The Reject Shop
, and for its access to high net-worth investors through Macquarie Private Wealth.

CBA landed the roll because of its ties to retail investors through online broker Commsec.

“A lot of their [Commsec’s] customers are Pie Face customers so it made sense," Mr Homschek, himself a former investment banker, said.

Legal advisers are expected to be appointed closer to the IPO date.

The Face has a regal registry

Co-founders Mr Homschek and Betty Fong – Mr Homschek’s wife whose expertise is in retail store design and operation – are the biggest shareholders with about 20 per cent of the company between them.

There are about 25 shareholders all up, including some high profile members of the investment community. Rothschild chairman Trevor Rowe, Fat Prophets managing director Angus Geddes and entrepreneur Brett Blundy are among the investors.

Pie Face is expected to target high net worth individuals in the pre-float funding stage to raise $10 million. Some of the existing investors are believed to have already committed to the pre-IPO placement.

The pre-float placement will help re-finance $2.5 million debt due at the end of the year. Pie Face has held the $2.5 million facility for the past four years and is keen to re-finance ahead of the due date.

Dual track process – ruled out for now

Pie Face and its advisers are setting the business for initial public offering in 2012. The fashionable dual-track sale process, where a business is simultaneously offered to trade buyers and investors, has already been ruled out by Pie Face’s management team.

“We are very much focused on executing the business model. For us the most efficient way to raise capital given our size is to have a very definite plan in terms of floating it and then working backwards and raising a bit of capital now," Mr Homschek said.

One problem with the dual-track could be a lack of trade buyers. Australia has few listed food services industry players; Domino’s Pizza Enterprises and Retail Food Group among them. But Domino’s is a single brand business and has expressed no intention of expanding its stable, while Retail Food Group is known for picking up cheap, mature assets.

Private equity buyers are also generally reluctant to pay high multiples for a growth story like Pie Face.

An IPO – but at what price?

Retail Food Group – owner of the Donut King, Brumby’s Bakeries and Michel’s Patisserie franchise systems – trades at about 10 times 2012 earnings. But bankers argue it is a mature business offering much less growth than Pie Face.

Domino’s, on the other hand, trades at about 18 times expected 2012 earnings, but it has a proven strategy and performance.

Carsales.com came to market in 2009 and was priced at about 22 times forecast earnings.

But the problem for Pie Face investors could be the certainty around earnings forecasts and belief in the growth story.

“It’s probably going to be at least that going forward. As we start to cover all of our fixed costs, the profit will look even better," Mr Homschek said.

The business only recently turned profitable and posted a $2 million profit for the December 2010 quarter. Its business model is revolved around critical mass, and with new stores being opened at a rate of three a month, it is expected to hit its strides later this year.

“If we keep up with the pace we are doing over the next 12-15 months we should really see a lot of momentum in the numbers as well as the metrics of the business," Mr Homschek said.

“We wouldn’t go public at less than $100 million valuation because it wouldn’t make sense.

“But we are hoping for better than that."

Pie in the sky ambitions?

While Pie Face and its bankers are guarding profit forecasts very closely, the company has identified Subway’s roll-out in Australia as something that they could hope to achieve.

“We look at people like Subway, with 1500 stores, and we look at Pie Face, and you can sort of see where we think this could wind up two, three, five years out," Mr Homschek said, referring to the US-owned sandwich chain.